Investing: Schwab's Coghlan on online trading

CBS.MarketWatch.com

SAN FRANCISCO (CBS.MW) -- That confident, conversational tone that the cocktail party conversations of day traders had just six months ago isn't all that relaxed these days -- and that's just the "tip of the iceberg," says John Coghlan, vice chairman at Charles Schwab & Co. SC.H, +0.00%
and head of the company's institutional services unit.

"Once we get through Y2K, that will certainly be a watershed moment. You may well find an escalation of relief that will be very good for the market." John Coghlan, Charles Schwab

In an interview with CBS MarketWatch, Coghlan said online trading is becoming more the realm of "investors" and less the realm of day traders, exemplified by the fact that the average number of trades per client is decreasing, while the overall volume of trades is increasing.

Why? Two reasons: More people other than just day traders are becoming familiar with investing online, and the volatility of stock markets over the past several months has prompted day traders to become more cautious.

Coghlan also says the economic impact of the Year 2000 computer bug might be "underappreciated." While Schwab's investor surveys don't detect a lot of skittishness, people are prudently preparing for the worst, and that's creating problems for some companies.

Investor worries though can be good for the stock market, he says, and the passing of Y2K could end up being a "watershed moment."

CBS.MW: How has the recent activity in the U.S. stock market affected Schwab clients?

Coghlan: The growth in the market has been a big part of the growth in online investing. It drives people into the marketplace. And the downward activity in some of those stocks over the last couple months has been a little sobering.

CBS.MW: How is online investing changing?

Coghlan: Individual traders who had some short-term successes that fueled their cocktail conversations aren't all having those conversations now. Until now, it has mostly been the people close to the market, the professionals, who were engaging in online trading. That has only been the tip of the iceberg.

Now, the average investor will move to the online space. Trading on an individual account basis will be lower over the next eight to 12 months, although the total volume of trades will be higher. There will be fewer traders and more investors. Even for the people who are day traders, the trading is becoming less spotty -- and less fun.

CBS.MW: How is all of this affecting Schwab?

Coghlan: Online investing isn't our only business at Schwab, but it's the most rapidly growing part of our retail business. Companies like Ameritrade"
and E*TradeEGRP, +0.53%
will experience more volatility because their business is completely online. It has a significant impact on us but it doesn't whipsaw the whole firm.

CBS.MW: What's your opinion of Y2K?

Coghlan: There are prudent, cautious measures that even corporate America is taking. Many firms have negotiated new lines of credit just in case. A number of firms that were considering equity offerings have instead lined up debt. A slowdown is being created by being prudent.

There are other businesses that will be more affected -- 401(k) businesses for example. And Schwab is in the 401(k) business. These are businesses where half of the conversions from one 401(k) plan to another tends to happen on January 1 every year. This year, the volume of business that converts on January 1 is down at least 50 percent and as much as 70 percent.

There are a number of other businesses that are being significantly impacted by Y2K. The economic impact may be underappreciated.

CBS.MW: What do Schwab clients say about Y2K?

Coghlan: We do a survey of that every month. The results are that vast preponderance of clients don't intend to do anything around their portfolios, but they are interested. That's why we will be open for business on January 1. Almost all Schwab employees will be available to serve customers.

CBS.MW: What do you think of concerns that the market and the economy are overheated?

Coghlan: That concern and worry has been out there for quite some time, and the economy continues to keep performing well. That's not a bad situation for the stock market. When people are complacent, that's when you should be concerned. Once we get through Y2K, that will certainly be a watershed moment. You may well find an escalation of relief that will be very good for the market.

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